How Lenders Decide to Give You Credit
Posted by : Premraj | Posted on : Friday, September 25, 2015
Most people need to apply for credit at one time or another. Buying a home is an expensive business and without a line of credit in the form of a mortgage, you would probably find it impossible to make the purchase. But applying for credit is not always a done deal. Lenders take lots of factors into account before they make a decision on whether to give you credit. If you are familiar with the decision making process, you can then take steps to ensure your finances are in the best possible shape before you apply for a loan, credit card, or mortgage.
Different lenders have different lending criteria, but generally speaking most will look at your credit history. A credit history tells lenders how often you have applied for credit and how well you have handled your money. So if you have had multiple UK home and personal loans over several years and always paid them back on time, it’s good, but if you have missed repayments or never had credit before, it’s not so good.
The information contained in your credit history file will be used to “credit score” you. The higher your score, the more likely you are to be eligible for larger amounts of credit. Some lenders even have a threshold and if you fall below this threshold, your application will be refused.
Lenders will want to know the details of your income, living expenses, and any existing debts you have. This helps them decide whether you can afford the repayments on the loan you are applying for. For larger loans, for example a mortgage application, the lender will want to see proof of earnings, copies of bank statements, etc.
Existing Lines of Credit
It may sound counter intuitive, but lenders prefer it when you have existing credit because they can see how well you are handling it. It is helpful if you have a mortgage, car loan, credit cards and perhaps a personal loan, but only if you are not maxed out to the limit of your income. You also need to be careful if you have lots of credit cards with large credit limits, even if you don’t use them.
Recent Credit Applications
Making several applications for credit in a short space of time leaves a credit trail and is a red flag to lenders. They assume that you are experiencing financial problems and are more likely to refuse you any more credit.
Check Your Credit File
It is a good idea to check your credit file before you make any important credit applications. There are three main credit reference agencies, each of which holds information on you. You are entitled to a copy of your credit file, although there may be a charge, but it is worth checking from time to time. Sometimes mistakes creep in or old information hasn’t been removed, which can affect an application or cause a lender to say “no”.
If a lender has turned you down, take a good look at your credit history and then take steps to repair any damage.